March 20, 2017 / 8:31 PM / a year ago

Fitch Affirms Entel at 'BBB'; Outlook Remains Negative

(The following statement was released by the rating agency) NEW YORK, March 20 (Fitch) Fitch Ratings has affirmed the long-term foreign and local currency Issuer Default Ratings (IDRs) of Empresa Nacional de Telecomunicaciones S.A. (ENTEL) at 'BBB'. Fitch has affirmed ENTEL's National long-term rating at 'AA-(cl)'. The Rating Outlook on the IDRs and National Long-term rating remains Negative. Fitch has also affirmed the company's USD1.8 billion senior unsecured notes at 'BBB'. A full list of rating actions follows at the end of this release. The affirmations reflect Fitch's expectations for ENTEL's gradual leverage recovery in the medium term, driven by EBITDA turnaround in its Peruvian operations, despite the current weak financial profile for the rating category. Fitch forecasts Entel Peru will experience narrow losses in 2017 and become EBITDA breakeven in the first quarter of 2018, with reduced capex during the period compared to 2015 and 2016. With an increasing operational scale and market position, Fitch believes the company should be able to improve adjusted net leverage to below 3.0x over the medium to long term, which would be in line with the current rating level. The Negative Outlook reflects execution risk for Entel Peru to achieve its deleveraging target given the intensely competitive landscape. While Peru still offers growth headroom compared to the more mature Chilean market, intense marketing efforts by all major operators could hinder the pace of Entel's profitability and leverage recovery. Continued delay in Entel Peru's EBITDA turnaround would result in a ratings downgrade. ENTEL's ratings also reflect its leading market position in the Chilean mobile telecommunications industry, fully integrated service portfolio, network competitiveness, strong brand recognition, and the moderate regulatory risk in Chile and Peru. The ratings are tempered by increasing industry maturity in Chile, the company's aggressive growth strategy in Peru, and increased leverage compared to its historical level. KEY RATING DRIVERS Gradual Deleveraging Expected: Fitch expects ENTEL to gradually reduce leverage as the operational scale of its Peruvian operation increases. In 2016, the company's adjusted net leverage reached 3.8x, which was a slight decline from the 2015 level of 4.0x. Fitch believes narrower EBITDA losses from Entel Peru, due to potential cost structure improvements with a bigger scale of operations, coupled with the company's stable performance in Chile should enable EBITDA improvement. Entel's consolidated EBITDA is expected to reach about CLP460 billion and CLP570 billion in 2017 and 2018, respectively, compared to CLP413 billion in 2016. As a result, Fitch forecasts the company's adjusted net adjusted leverage to fall below 3.0x in the medium term. Negative FCF to Continue in 2017: Fitch does not believe ENTEL will be able to curb negative FCF generation in 2017. Annual capex will continue to be high during 2017 and 2018 at CLP400-CLP420 billion to support the company's growth strategy in Peru and Chile, given the competitive operating environments in both countries. Fitch expects neutral to modestly positive FCF generation in 2018, mainly backed by a gradual performance improvement in Peru, which is expected to reach breakeven EBITDA in 1Q18. Growth in Peru: Ongoing subscriber base expansion in Peru should help achieve EBITDA turnaround in Peru in the short to medium term. The company has managed to grow its subscriber base in line with its business targets, and Fitch forecasts ENTEL's client base to reach 9 million by year-end 2018, from approximately 4.8 million at year-end 2016, which would represent an estimated subscriber market share of around 20% and a revenue share of 25% in 2018. ENTEL is the third player in the Peruvian mobile market, with a 14% subscriber market share and a 16% revenue market share in 2016. In the absence of any sizable increase in subscriber acquisition costs, increased scale should facilitate deleveraging due to higher EBITDA generation in the country. Entel Peru's strategy will be focused on continued data penetration to leverage its aggressive investments into 4G networks, increasing its high-end postpaid customer base, and more disciplined client acquisition costs. Fitch expects this strategy to help stabilize blended average revenue per user (ARPU) in the absence of new regulatory tariff changes. It yielded strong revenue growth of 46% to CLP357 billion (USD531 million) in 2016, with a 54% subscriber base growth, but EBITDA remained negative at USD180 million during the period (USD245 of loss in 2015). Fitch expects continued negative EBITDA until 2017 due to high subscriber acquisition costs. Capex requirements in Peru will fall going forward, following the 700Mhz spectrum acquisition in 2016, to around USD150 million annually in 2017 and 2018. Capital Increase improves Financial Flexibility: ENTEL completed a CLP 353.7 billion equity increase (USD523 million) in August 2016. The proceeds were used to enhance financial flexibility of the company and fund the investment plans in Entel Peru, mainly the recent acquisition of one of the three blocks of 700 Mhz spectrum for USD295 million. The committed participation of Almendral S.A. in ENTEL's capital increase was financed through Almendral's own capital Increase of CLP 163 billion, which represented 84% of the total commitment, with the remaining 16% funded by with debt. This demonstrates the commitment and solid support of controlling shareholders to ENTEL's strategy and investment plan. Stable Operations in Chile: ENTEL was able to maintain stable operational performance in Chile and increase its EBITDA margin to 35% in 2016, despite access charge reduction and competitive pressures. In 2017, Fitch expects more competition in the mobile industry with more aggressive commercial offerings by ENTEL, leveraging its solid network competitiveness. The company should be able to offset EBITDA margin pressures in 2017-2018 by maintaining its revenue market share with increasing fixed and corporate businesses, and data penetration. Equity Rating: ENTEL's equity rating is based on the company's strong credit profile, its long track record in the stock market, a 45.1% of free float and a market presence of 100%. ENTEL also reports market capitalization of USD3.3 billion, making it one of the most important players in the Santiago stock market, and high levels of daily trading volume that averaged USD2.7 million in 2016 (based on March 2017 information). DERIVATION SUMMARY Entel's current financial profile is weak compared to the 'BBB' category telecom operators in the region. However, Fitch's ratings are based on the company's potential medium-term leverage recovery to a level in line with the current rating. Despite Entel's small market position in Peru, the company retains a solid leading market position in Chile, backed by strong network competitiveness and brand recognition, which enable stable cash flow generation from the country. Parent-subsidiary linkage exists with its parent, Almendral S.A., of which National rating is rated one notch below that of Entel.No country ceiling constraint or operating environment influence was in effect for the ratings. KEY ASSUMPTIONS --Chilean operational revenues to grow by low-single-digits in 2017 and 2018 and EBITDA margins to remain stable in the range of 33%-34%; --EBITDA generation for Entel Peru remains negative until 2017, with a breakeven of operational results in 1Q2018; --Off-balance-sheet debt of CLP 420 billion; --A dividends policy returning 50% of net income during 2017-2018-2019; --A capex-to-sales ratio gradually falling from around 30% in 2015 to a range of 18%-20% in 2017 and 2018. Estimated capex of CLP400 billion in 2017 and CLP420 billion in 2018; --FCF generation to remain negative until 2018; --Net adjusted debt/EBITDAR leverage to decline gradually to 2.5x in the medium term. RATING SENSITIVITIES Further negative rating actions will largely hinge on the turnaround of ENTEL's Peruvian operation. Fitch expects a gradual reduction in the company's medium-term leverage, after the peak level seen in 2015. ENTEL's failure to improve net leverage to well below 3.0x on a sustained basis, due to a combination of higher-than-expected capex, delays in achieving a breakeven EBITDA of Peruvian operations, and weakening of the Chilean operation's performance could result in a downgrade. Fitch does not foresee a positive rating action over the medium term given the ongoing losses of Entel Peru and its high leverage compared to historical levels. LIQUIDITY Entel has an extended debt maturity profile, with the next sizable debt maturity of USD150 million due in 2019 and the same amount again in 2020, following refinancing of debt maturities in 2015 and 2016. The recent capital increase of USD517 million, used largely to finance the acquisition of 700 MHz spectrum in Peru, improved the company's liquidity but was partially offset by higher working capital requirements. Fitch expects this cash to be reduced in 2017 with a moderate recovery in 2018 and 2019, as the turnaround in the Peruvian operation's performance is achieved. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Empresa Nacional de Telecomunicaciones S.A (Entel) --Foreign and local currency long-term IDRs at 'BBB'; --USD800 million senior unsecured notes due in 2026 at 'BBB'. --USD1 billion senior unsecured notes due in 2024 at 'BBB'. --National Scale long-term ratings at 'AA-(cl)'; --Debt issuance programs #674 (Series K and L, registered but not issued) and #675 (Series M) at 'AA-(cl)'; --Commercial paper at 'AA-(cl)/N1+(cl)'; --National Equity Rating at 'First Class, Level 1'. The Rating Outlook remains Negative. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3112 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Francisco Mercadal Associate Director +56 2 24993340 Committee Chairperson Joseph Bormann Managing Director +1-312-368-3349 Date of Relevant Rating Committee: March 17, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information. 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